Canada's quarterly Hog Statistics report was released yesterday by Statistics Canada. The report showed a continuing decline in hog numbers, especially in the market hog categories.
Canada's inventory of pigs weighing over 20 kg (44 lb.) was 7.6% smaller on Oct. 1, 2007 compared to one year earlier. The reduction reflects higher exports of feeder pigs to the United States, which are up 7.2%, year-to-date.
Canada's breeding herd continues to shrink and was 1.4% lower than one year ago. That number is a slightly larger decline than the last quarterly report (see Figure 1), but reflects the economic pressure that has come to bear on Canadian producers. This marks the 10th straight quarter in which the Canadian herd has declined relative to one year earlier. The herd, now numbering 1.56 million head, is the smallest it's been since October 2002, and it is 4.5% smaller than it was at its peak in January 2005.
The decline of Canadian breeding hog numbers, when combined with growth in the United States, leaves the Canadian-U.S. herd 0.6% larger than it was last fall. That is about the same rate that the combined herds have grown for the past seven quarters.
The economic pressure in Canada has increased during October and is likely to get more intense. The Canadian dollar is beyond par with the U.S. dollar and has gained over 35% in value over the past five years. That gain has caused Canadian hog and pork prices to steadily erode relative to U.S. prices. We have to remember that in the North American pork market, the United States is the dog and Canada is the tail when it comes to hog prices. When stated in the same currency, prices move together, but the exchange rate is the translator that has changed dramatically.
On the other side of the ledger, only about half of Canadian costs are directly tied to the U.S. dollar. That half of costs has gone down but the other half has remained high, putting Canadian producers in a very bad cost-price squeeze. The real trouble arises when you factor in higher wheat and barley prices, which have caused the dollar-denominated costs (that should have fallen) to go up as well for producers who use those grains as feed. It is not a good situation for the Prairie Provinces, most notably Alberta, which saw the largest breeding herd reduction excluding the Maritime Provinces.
I expect more reductions in Canada and I fear that they may be very severe before this is over.
A Bit of Good News
Although many of you will see this as rather perverse -- things aren't as bad as they should be, or at least as they could be. Many of you will not like that statement, so I ask you to write it off to economist pin-headedness. Let me explain.
Look at this week's Price and Production tables (below). U.S. hog slaughter for the week that ended Oct. 20 was nearly 6% larger than one year ago. Combined Canadian-U.S. slaughter was 5% larger. The same percentages apply to pork production since weights were quite close to year-ago levels. The normal relationship between percentage price change and percentage quantity change is -3:1. I would probably use -4:1 at present, since we are so close to slaughter capacity in the United States.
That relationship would suggest hog prices 15-20% lower than one year ago. Canadian prices are indeed that much lower, but that decline is largely due to a Canadian dollar that is 16% stronger than last year! U.S. prices are down only 6 to 8%. That says that live hog demand is very good due to, I'm quite confident, stronger domestic pork demand, higher export values (and, quite possibly, higher volume in recent weeks) and, surprisingly tight packer margins (see Figure 2).
Perhaps "tight" is not the correct descriptor for last week's margin but "tighter than they should be with 2.3 million-plus hogs every week" would certainly be appropriate. In spite of those slaughter levels, packers are still competing for hogs. Packers' net margins are probably pretty good since this level of throughput would divide fixed and sunk costs over many, many pounds and leave them just about as low on a per unit basis as they could possibly be. One caveat is that these computations use "net" prices, which are being helped mightily by the Other Formula prices that we discussed last week. Margins on hogs purchased on the spot market (i.e. negotiated prices) are considerably better.
And finally -- the hero in this whole mess may just be chicken. I know it is hard to admit that, but chicken part prices are still double-digits above last year in spite of production that is now consistently running 2-3% higher. Let's hope that continues. We still need all the help we can get!
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.